Axios Pro: Energy Policy

April 05, 2023

Axios Pro Exclusive Content

🥷 What's up, Wednesday warriors? Chag Pesach Sameach if you celebrate!

  • We're on a reduced recess schedule this week, but we're here with a special treat: Jael, our resident mining nerd, spent a week diving into the EV tax credit mess so you don't have to.

🎺 We're asking our sources for the last song they listened to. Today's is from Rep. Raúl Grijalva: "Is It Any Wonder?" by Durand Jones & the Indications.

1 big thing: The incredible shrinking EV credit

Illustration: Annelise Capossela/Axios

Despite President Biden’s best efforts, experts say his expanded consumer EV tax credit might be unworkable for many car models until it expires, Jael writes.

Why it matters: It's still early, but it appears that many EV consumers won't be able to take full advantage of the IRA unless carmakers use a lease-based loophole.

Catch up quick: The IRA expanded a $7,500 credit for consumers who buy EVs, lifting a cap that let vehicles qualify only if their manufacturers have sold fewer than 200,000 electric models.

  • But Sen. Joe Manchin conditioned his yes vote for the IRA on replacing the cap with supply chain rules to decouple EVs in the U.S. from China.
  • Now half the credit is tied to whether an EV’s battery components are made in North America. This part will be easier for automakers to deal with.

The challenge is with the other half, which requires a percentage of a battery’s minerals to come from the United States, or a nation with a U.S. free trade agreement. Minerals recycled in North America can also count.

  • The mineral percentage begins at 40%, then ramps up significantly over the next few years.
  • Both halves also have a caveat: EVs can't qualify if their battery supplies come from a “foreign entity of concern,” a term other agencies recently said can apply to China-linked firms and some joint ventures.

Reality check: These requirements will kneecap the credit’s impact for everyday consumers.

Biden has offered flexibility for the mineral requirements with a more expansive definition of a "free trade agreement" than past practice.

  • But carmakers remain in the lurch regarding the regulatory definition of "foreign entity of concern." Biden's team has not said when its interpretation will arrive, creating uncertainty about what China-linked supplies might be off the table in the future.

Between the lines: Tax policy veterans and EV industry insiders told Jael that many vehicles may never be eligible for the credit.

  • One EV industry source, who requested anonymity to speak candidly, said a strict anti-China definition of "foreign entity of concern" could render many EV models forever incapable of accessing the full credit.
  • “If [the] Treasury chooses to do that, that’s a possibility,” the source said.
  • David Camerucci, a global tax incentive expert at EY, agreed. “Under the current rules, you’re probably going to see some vehicles [qualify for only] $3,750,” he told Jael. "Some vehicles may not get there at all."
  • We expect more info on how many vehicles qualify when the rule goes into effect this month.

Zoom in: Battery supply experts said the credit's 10-year window may also not be long enough to redesign supply lines, so the requirements could wind up not moving the needle on China's control over EV markets.

  • “Especially if the growth will be from the actual tax credits, then it’s not a long time at all,” said Hans Eric Melin of Circular Energy Storage, a battery supply chain consultancy firm.

Permitting speeds aren't solely to blame for how long this will all take.

  • Mines, for example, can take decades because of how much time is required to explore and verify mineral resources, in addition to the huge financing needed to build them.
  • “All these projects take time,” said Benchmark Mineral Intelligence's Henry Sanderson. “How can you totally avoid Chinese companies? It just seems very difficult to do.”

Yes, but: James Wickett, a tax policy specialist at law firm Hogan Lovells, said "a lot of automakers will just shift to a leas[ing] model" to use a separate $7,500 benefit in the IRA for leasing that has no sourcing stipulations.

  • "The lease credit is kind of a workaround, but I think it's important to not dismiss that as trivial. I think it could be enormous," Wickett told Jael.

What we're watching: a carveout sought by the auto industry to allow what they consider trace mineral supplies from "foreign entities of concern."

  • Automakers filed different proposals for this "de minimis" threshold to Treasury in comment letters late last year. Expect this to be another Manchin gripe if any of them are adopted.
  • “The [mineral] rules get easier to overcome if there is some kind of de minimis threshold," Wickett said.

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